## Your Mortgage is an Investment

## Invest In Your Future

More people are becoming aware that Old Age Security and the Canada Pension Plan will not be sufficient for retirement at age 65. The onus is on you to determine how comfortable you can make your retirement years. An excellent way to secure a better retirement is to maximize the use of your RRSP contributions. If your mortgage is not paid off before you retire it will be more difficult to make significant contributions.

A simple financial plan is as follows, … when your mortgage is paid off, continue that cash outlay, that used to go towards the mortgage, but pay it towards an investment vehicle inside your RRSP. According to 1991 Statistics Canada figures, 66% of all workers over 45 years of age own their homes free and clear. Thus 2/3 of all workers in Canada, over 45 years of age, have at least 20 years to prepare for retirement. Future economic projections are extremely difficult or else we would all be wealthy. However just because something is difficult does not mean you should not undertake the task.. You must start planning your future NOW because it is becoming more obvious that the government is going to have trouble honoring Old Age Security (OAS) payments and Canada Pension Plan (CPP) payments in the future. A person retiring today with only the CPP and OAS as their only source of income would be looking at approximately one thousand dollars per month which is not a lot of money in today’s economic climate. Anyone putting faith in the governments ability of caring for his or her retirement is very niave. The golden years could turn out to be a nightmare if one outlives his or her money.

If you want to have $50,000 of interest income 25 years from now then you must have one million dollars accumulated (5% of 1,000,000 is 50,000). This is assuming zero inflation. If you assume 1% inflation (a pipe dream) then the 50,000 will actually be worth $39,000 The point is, you would still need the one million dollars to generate 50,000 dollars of interest income even though it would buy only 39,000 dollars of purchasing power.

How are you going to accumulate $1,000,000 in 25 years? Your mortgage must be paid off as soon as possible so that you have TIME on your side working for you. The sooner you start putting money away for your retirement the smaller the monthly commitments. At first it seems like an impossible task. Broken down into simple steps it is easier to visualize. You need to get from point A to point B and at point B you need $1,000,000 “in the Bank”. There are many ways to make the journey From A to B, and a competent, experienced financial planner is essential unless you have the time and expertise to study all the investment choices. Before you consult a financial planner you must have a goal. The calculations for the future cash accumulation is the easiest part of the goal attaining process. Choosing the financial vehicles required to get from point A to point B is the difficult part of the task. For most people, this latter task is best handled by a competent financial planner.

From the approximate values in Table 1, you can see that a 5% growth (5% annual return or yield) you need to put away $1707 per month for the next 25 years. At a 10% annual growth, $811 per month for the next 25 years. At a 15% growth the monthly cash outlay need only be $367 and at a 30% annual growth the monthly cash outlay need only be $32 which seems incredible, but true.

Annual growth rates for equities (stocks) in North America as per the Standard and Poors index for the last 70 years was 11.20% whereas long term government debt (Bonds) historically yielded 4.8% to 5.0% over the 70 years.

An often talked about investment vehicle is Fidelity Magellan, an American mutual fund that was managed by Peter Lynch (fund manager) for ten years with an average annual yield of 30% over the ten years. The Templeton Growth Fund, a Canadian mutual fund managed by Sir John Templeton (fund manager) for the last 39 years gave an annual average yield of 15.3% per year. The approximate values in Table 1 dramatically show the effect of time and yield on the accumulation of a million dollars. Time and yield are connected and when you have less of one then the other needs to be increased.

An independent Financial Planner should always stress that you must balance risk and yield. Government Bonds are generally the safest but the lowest yields whereas, aggressively growing stocks give higher yields but always at a relative amount of risk. Generally the higher the yield the higher the risk.

Using the MORTGAGE2 PRO negative amortization feature, let us see how the $1,226 a month for 30 years growing at a 5% annual rate was arrived at in order to get one million dollars accumulated. First change the compounding to Annual, set the Annual Interest Rate to 5%, the Amortization Period to 30 years and the monthly payment to $1,226 in the CALCULATOR. Then go into the SPREADSHEET and set the first payment equal to zero, then use the block copy (Crtl+V) and copy the zero first pmt all the way down to the 360 th payment. Result $999,650.96

It is interesting to note that if one did not want to put away $1226 per month for the next 30 years then they could initially put $231,296.67 in an interest bearing account that had an annual growth of 5% and leave it there for 30 years. The result would be the same, $999,650.96 The power of compounding was once referred to as the 8th wonder of the world by Einstein.

Becoming mortgage free is the first step in achieving financial independence for retirement.